The Energy Space

Oil prices may fall slightly in the near-term, as pressure is offered by technical factors and the lack of progress in fiscal cliff negotiations. Background pressure will come from next week's OPEC meeting where quotas are expected to be left unchanged, and from the growing amount of U.S. oil production. These could take WTI down toward the $85.00/bbl level through year-end unless a fix to the cliff is negotiated. Opposing support will come from the two-week downtrend in the dollar, and from events in the Middle East. API data were bullish for crude yesterday and bearish for products. We would trade energies as a negative affair in the near-term, and given the relatively sideways nature of the market in recent weeks, patience will continue to be required.

WTI finished 59 cents lower yesterday while Brent settled down $1.08. The market followed-through to the downside early in the session after Monday's bearish reversal pattern on the candlestick chart shown above. The weakness was mainly the result of bearish technical factors and a perceived lack of progress in fiscal cliff negotiations. It came despite the very same weakness in the dollar that supported the market on Monday, and despite the evacuation of the Egyptian president from his palace yesterday due to protests outside. Iran said that it captured a U.S. drone, but that event didn't create much support either.

The technical situation is a bit negative in the short-term in our view, and stems from the bearish shooting star reversal pattern created on the candlestick chart on Monday. The reversal was made after the market tested and held at the Nov 19th high at $89.80 on a closing basis. The 50-day moving average was held with only a small breach. It also came after Friday's COT data showed a reduction in the non-commercial net long of 40,625 contracts. Managed money traders added only 6,409 contracts to their small net long position. While technicals are negative based on these indications, it would have been more comforting to see yesterday's trade close near the day's low rather than recover back toward the high.

The lack of progress in fiscal cliff negotiations is also a key issue on the negative side and may remain so for another week or two. It's difficult to see through the politics sometimes, as both sides likely want to take negotiations to the verge of the cliff in order to show constituents that their interests are being served. Some papers are suggesting that the president has an informal target deadline of Dec 15th and a hard deadline of Dec 21st. ABC has reported that republicans have a "doomsday plan" if negotiations break down that would extend tax cuts for those under $250K but offer nothing else on the debt ceiling, unemployment benefit extensions, closing loopholes, etc. Pres Obama suggested in a Bloomberg TV interview yesterday that there is potential for a deal but tax rates need to rise. The White House rejected the republican offer submitted on Monday immediately. It may not be the negotiations that are the most important here, but how they are perceived by ratings agencies. It didn't seem in Aug 2011 that debt-ceiling negotiations to cut spending and make the U.S. less indebted would result in the loss of the AAA rating from S&P. But the negotiations proceeded for too long. If the economy goes over the cliff this year, a ratings downgrade could pressure the economy and thus oil prices.

Natural Gas

January futures settled 5.2 cents lower yesterday and more than wiped out the 3.0 cent rally seen on Monday. On another opposite note from Monday, the selloff was blamed on warm weather as opposed to Monday's colder forecasts. In our report yesterday, we noted that technicals were a slight positive in the near-term while weather was a negative, and we still feel that way after yesterday's trade. Prices could firm slightly in the near-term toward the $3.70-$3.75 range.

There's key support that's still intact at $3.52 from the 200-day MA in NGF3, at $3.54 from the bottom of a bullish flag continuation pattern, and at $3.57 from the 50-day MA on the continuation chart. Yesterday's trade settled in the middle of that range at $3.539. In addition to those technical levels, there's also support from a developing bullish divergence on the daily stochastics, and from a favorable seasonal pattern that runs from Dec 3rd-Dec 20th. The seasonal pattern is accentuated in years when the inventory injection season finishes early as it did this year.

The weather issue is a negative, as 70 degrees was reported in Chicago on Monday. Last week's gas trade lost more than 40 cents on the above-normal forecasts, and a report by Chicago's WGN on Monday adds to the prospect of a warm winter. It suggested that the average date of Chicago's first measurable snow since 1990 has been November 16th and said that the deeper the calendar goes into December, the stronger that history speaks for a sub-normal snow season ahead. Since 1990, the latest measurable snows have come on 2001's December 14th, 2003's December 10th, and 2011's December 9th. 2011 was obviously a warm winter and could suggest the same for this year, if reduced snow cover prevents reflective heating. NOAA's 8-14 day forecast yesterday showed above-normal temps in the eastern two-thirds of the country. We're predicting a draw in gas stocks on Thursday of 65 bcf, which would be greater than the 51 bcf average. However, we don't anticipate a strongly positive reaction given that last week's report of +4 bcf signaled that production may be strongly outstripping demand again as it did earlier this year.

Global Economic & Dollar News

» Australia's RBA cut the cash rate by 25 bp to 3.00% which was as-expected.

» Spain's Catalonia Region won't hit its 2013 deficit target, according to the leader of the region.

» Pres Obama said that there is a potential of getting a deal on the fiscal cliff but said the Boehner proposal is still out of balance. He added the economy is "poised to take off" after a cliff deal.

» House Speaker Boehner said that the president is not showing that he wants to avoid the fiscal cliff. He said that instead, the president has offered a plan that could not pass either house of congress.

» Senate Minority Leader McConnell said that an enormous amount of time has been wasted in the fiscal cliff talks.

Energy News

» Iran said that it captured a U.S. drone over the Persian Gulf, although the U.S. said that none are missing.

» Egypt's President Mursi left the presidential palace yesterday due to protests held outside. Protesters issued a "final warning" after he expanded his powers and called a referendum on a constitution drafted by an Islamist-dominated panel.

Upcoming Energy Events

Wed - ADP Payrolls

Wed - EIA Weekly Oil Inventories (10:30am EST)

Thu - Natural Gas Inventories (10:30am EST)

Fri - U.S. Non-Farm Payrolls

Tue - API Inventories (4:30pm EST)

Dec 11th - EIA's Short-Term Outlook

Dec 12th - IEA's Monthly Report

Dec 12th - OPEC Meeting

Dec 12th - FOMC Meeting and Press Conference

Analysis

EIA Inventory Preview

The EIA may report a drop in oil inventories this week as the five-year average suggests, however, it should be much smaller than the 2.9 MB average decline. EOX anticipates a drop of 0.5 MB this week, as this year's trend in December should be somewhat counter to that which is typical. Issues related to LIFO accounting typically cause refiners to reduce inventories late in the year when prices advance as the year progresses. Inventories typically fall 13.5 MB between the w/e Nov 30th and Dec 28th, according to the five-year average. Rising prices haven't been an issue this year, and may help keep inventories elevated as a result. Rising domestic oil production is another factor that's likely to keep inventories buoyed this week, as output has increased 1.33 mb/d in the 12 weeks since the 772 kb/d drop caused by Hurricane Isaac. Imports have trended near the low-end of the recent range, but there's little incentive for refiners to increase them, with stocks currently more than 40 MB above the five-year average and refinery margins low.

Refinery utilization usually surges this week before reaching a small peak and declining through year-end. Given low profit margins, however, we don't anticipate a very large increase. It's safe to say that gasoline will build this week, but distillates have still been slow to increase. Gasoline demand is usually steady at low levels at this time of year, while distillate demand usually increases starting this week. We anticipate gains of 2.0 MB and 0.5 MB respectively.

Natural gas stocks may fall 65 bcf according to our estimate, as heating degree days were a fairly high 160-165 according to NOAA. Such a reading would cause our model to predict a draw of 85-90 bcf, however, it has underestimated increases in production for most of this year. Our estimate of 65 bcf is more than the five-year average would suggest is typical for this week, but we don't necessarily expect a bullish market reaction on Thursday. A quick look at temperatures in Chicago showed them 1.07 degrees above normal during the survey week, which may reduce heat demand. We're also wary about expecting a bullish number after last week's 4 bcf increase.

*The API convergence figures are the amounts that EIA data need to change in order to match the previous day's API figures

Grains Commentary

Published Tuesday morning, 12/4/12

I am going to present the wire in a little different slant today, as I mentioned last week we are going to try some new approaches of doing things as we head into the New Year and since markets are as slow as they are I thought we would try a few new things.

The CN13-CZ13 spread is currently trading at +$1.07 with a high of nearly +$1.60 last August, there are many things that we know now that wasn't known back then and obviously there are still unknowns ahead.

We have learned over the years that inverse on spreads are there to do 2 jobs, 1) to pull out every kernel of grain out of farmers hands into the market and 2) to push the consumer to reduce current consumption and attempt to move it out forward. It's difficult to know when the tide turns on these but in recent years when they turn it can be fast and furious.

The current corn basis is at or near record high levels, but yet export demand is still bleak, the market keeps hoping for US exports to increase as SA availability shrinks, but yet what NO-ONE wants to discuss is that with each passing day SA is 1 day closer to new crop availability and will once again return with a vengeance to the export markets. We also point out that there is still corn coming out of parts of E-Bloc countries.

The US elevators are filled to the brim in many locations with corn which a good percentage of this grain is still unsold, without a massive weather problem in the next 4-6 weeks in SA the corn spreads could be the best sale starting off 2013. The CN12-CZ12 was similar to the current spread as it was thought to be the one that goes to $2+ but yet finished at a feeble +15. The current USDA C/O is hovering in the 650m bushel range, extremely tight, but it seems that over the years the markets have done a very good job of dealing with tight supplies from a global supply chain rather than just focusing on the US balance sheet.

Acreage for new crop corn will be massive we all know this as further projections are 97 million acres for corn, this will indeed put a lid on any rally for CZ13 for the time being, but if CZ breaks then does some of these acres move to something else, that's why CZ13 will struggle to break significantly between now and May of 2013.

So what does one do to capture something like this, look to buy the CN 7 puts for 32 cents and at the same time sell the CZ13 6-5 put spread for a 30 cent credit. Play this out on expiration day and having the CN13-CZ13 trading at +15 and placing CZ13 at $5.50 which places CN13 at $5.65 the CZ13 put spread will have a value of 51 cents and the CN 7 puts will have a value of $1.35 for a profit of 82 cents.

There are many other plays to look, this is just one, we welcome your feedback regarding these new ideas.